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Qwest touts growth in Web and data markets

The company aims to ride the wave of growth awaiting many fiber-optic communications carriers as demand for data services and Net access increases.

Joe Nacchio, chief executive at Qwest Communications International, is betting on the Net.

One thing is clear from Qwest's quarterly financial results Wednesday: The telecom player will depend heavily on its Internet and data service businesses to spearhead future growth, a common refrain among its entrenched competitors.

The telecom company reported pro forma fourth-quarter earnings that met Wall Street consensus estimates, buoyed by strong Net sales.

Qwest said its main growth came from the Internet and data services market, which grew 40 percent from last year to $1.15 billion in the quarter and comprised 23 percent of total revenue for the quarter.

For the year, Qwest said that total revenue climbed 14 percent to $18.95 billion. Qwest's Net and data services also grew more than 60 percent in 2000, and the company believes this growth will continue.

"Qwest has indicated that it can sustain compounded annual 40 percent growth until 2005," said Drake Johnstone, a communications equity analyst at Davenport.

Qwest aims to ride the wave of growth awaiting many fiber-optic communications carriers. Demand for data services and Net access is growing among business customers, and Qwest is using its cash flow from US West's local voice business to fund new Internet and application hosting initiatives.

The company told analysts in October that markets for virtual private networks (VPN), or private Net-based business connections, will grow to $7.5 billion in 2005 on a compound annual growth rate of 72 percent. Qwest also expects the market Internet data hosting to grow 67 percent to $28 billion in 2004.

Yet at least one Wall Street analyst will wait and see if Qwest meets its ambitious goals. "It's an excellent company that the majority of the telecom services investment community believes in," said Andrew Hamerling, an analyst at Banc of America Securities. "But the company has set some challenging growth hurdles for itself in a potentially challenging...environment."

Hamerling notes that falling prices across the industry may put a significant strain on Qwest's ability to meet its targets.

However, Johnstone believes the company is making gains in its consumer long-distance voice business, while industry giants like AT&T and WorldCom are getting whacked in that area.

"AT&T and WorldCom have essentially ceded the long-distance business to the local phone companies. They're not trying to compete on price," Johnstone said. The big telecom companies are managing their long-distance business for cash flow and tend not to lower prices to gain market share, he added.

Qwest also made significant inroads into the international market through its European subsidiary, KPNQwest.

KPNQwest reported fourth-quarter revenue of $134 million (145 euros) from $74.8 million last year, an increase of 78 percent. For the year, revenue grew 103 percent to nearly $426 million from almost $210 million last year.

Net loss for the quarter was $52.4 million, or 12 cents a share, which compares with a loss of $27.2 million, or 6 cents a share a year ago. For the full year, KPNQwest reported a net loss of almost $128 million, or 29 cents a share, versus a loss of $63.6 million, or 16 cents a share last year.

BellSouth, which has 3 percent stake in Qwest, also reported strong earnings this week.

Adjusted for special items, including a restructuring charge of 18 cents a share, fourth-quarter earnings for BellSouth were 57 cents per share compared with earnings of 53 cents in the same quarter a year ago. For the year, adjusted earnings per share were $2.20, a 10 percent increase compared with $2 per share in 1999.